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2009
June

# WTO Case Challenging China's Export Restraints on Raw Material Inputs

*"U.S. industries and workers can compete against anyone if the playing field is level. But China's policies on these raw materials appear to tilt that field in favor of Chinese producers**.  Now, more than ever, we must fight against this kind of domestic favoritism."*- United States Trade Representative Ron Kirk

**What Chinese Policies Are at Issue?**

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products.  The principal measures include:
                  -  Export quotas that tightly restrict the volumes of material that can be exported from China 
                  -  Export duties that raise the export price for the raw material inputs 
                  -  Other export restraints, including export licensing, minimum export price requirements, and export quota administration procedures that appear, among other problems, to limit eligible exporters and require exporters to pay substantial fees for the right to export these materials 

**Why Is This a WTO Problem?**
                  -  **Export Quotas****:** World Trade Organization (WTO) rules generally prohibit a WTO Member from imposing restrictions on exports such as export quotas. 
                  -  **Export Duties****:**When China joined the WTO in December 2001, China also specifically committed not to impose duties or taxes on exports, except for limited duties on a small number of products specifically identified in an annex to China's WTO protocol of accession. The export duties the United States is challenging are not covered by those exceptions. 

**Other Export Restraints****:**The WTO generally prohibits export restraints such as export licensing and minimum export prices and imposes limits on the amount of export fees that can be charged.  Furthermore, when China joined the WTO in December 2001, it specifically committed not to place limits on who can export products.

****

**How do China's Export Restraints Disadvantage U.S. Manufacturers and Workers?**

China's export restraints on raw material inputs can create enormous competitive advantages for downstream Chinese manufacturers and exporters in markets around the world.  At the same time, the restraints seriously disadvantage U.S. and other foreign manufacturers, exporters, and workers in many downstream industries that make or use processed steel, aluminum and chemical products.
                  -  China's export quotas limit foreign access to these raw material inputs. 
                  -  Because China is a leading world source of the raw materials, the export quotas can also raise world market prices for these inputs. The duties that China places on exports of the inputs further contribute to increased world prices. 
                  -  At the same time, the export quotas increase the availability of the raw material inputs in China, creating lower domestic prices that can translate into significant cost advantages for China's downstream producers when they compete against foreign counterparts in China or around the world. 
                  -  A prime example of the highly distortive effects of China's export restraints: the raw material input coke, a key steel input processed from a type of coal known as coking coal. In 2008, China was the world's leading producer of coke, accounting for approximately 60 percent of global production. China's production totaled 336 million metric tons (MT), but China placed export quotas on coke that limited annual exports to only 12 million MT. In addition, China imposed substantial duties on coke allowed to be exported - first, 25 percent export duties, and later in the year, 40 percent duties. The price effects were dramatic. In August 2008, when the world price for finished steel was approximately $1,150 per MT, China's domestic price for coke was $472 per MT, while the world price for coke was $740 per MT. Because it takes about one MT of coke to make one MT of steel in China, China's downstream steel producers obtained a dramatic competitive advantage by incurring input costs for coke that were $268 per MT less than their foreign counterparts. 

**Which Raw Material Inputs Are at Issue in This Dispute?**

China imposes export restraints on numerous raw materials and partially processed raw materials.  The dispute filed today addresses various unprocessed and processed forms of nine inputs of key interest to a wide range of U.S. industries:  bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc.
                  -  These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products. 
                  -  Just some of the products incorporating the raw material inputs at issue include: 

-      semi-finished and finished aluminum and aluminum alloy products and numerous products made with aluminum components, such as beverage cans, foil, baseball bats, windows and siding, compact discs and consumer electronics

-      semi-finished and finished steel and steel alloy products and numerous products made with steel components, such as building supports and building materials, motor vehicles, equipment and major appliances

-      fluorine-based chemicals, which are used in a wide variety of applications, including chemical processing, electrical products, textile laminates, automotive, consumer and industrial coatings, refrigerants, foam blowing agents and fiber products

-      chemicals such as silanes and silicones, which are used in waterproofing treatments, molding compounds and mold-release agents, mechanical seals, high temperature greases and waxes, caulking compounds, contact lenses and pyrotechnics

-      phosphorus-based chemicals, which are used in a wide range of applications, from flame retardants and pigments to additives and vitamins

-      abrasives, cutting tools, ceramics, refractory materials, cosmetics, semiconductor chips, microprocessors, solar cells, rubber products, batteries, paints and medicines

-      semi-finished and finished brass products and numerous products made with brass components, such as plumbing fixtures, door hardware and electrical accessories

****

****

**Why Pursue WTO Dispute Settlement?**

****
                  -  The United States is committed to fairness in the international trading system. This includes ensuring that China abides by the rules it agreed to as a WTO Member. 
                  -  The United States worked hard to use discussions with the Chinese to arrive at a resolution regarding this serious concern. Those discussions unfortunately failed to resolve the dispute. As a result, the United States today took the first step to bring this case before the WTO. 
                  -  Under WTO dispute settlement procedures, the United States and China would normally consult within 30 days. The United States hopes that these consultations will produce a satisfactory result. If they do not, then any time after 60 days from the request for consultations, the United States has the right to request that the WTO establish a dispute settlement panel to examine the matter. 
                  -  WTO dispute settlement rules have facilitated and are assisting us in the resolution of other trade disputes with China: 

-      March 2004:  After the United States filed a WTO dispute against China challenging value-added tax rebates that discriminated against imported semiconductors, the United States and China resolved the matter during the consultation phase, ensuring fair access to a market worth over $2 billion to U.S. manufacturers and workers in the semiconductor industry.

-      January 2006:  The United States and China resolved a dispute involving China's imposition of antidumping duties on kraft linerboard shortly after the United States informed China that it would soon be filing a request for WTO consultations.  China eliminated the antidumping order on kraft linerboard, terminating the unfair barrier to U.S. paper products and benefiting U.S. kraft linerboard mills in 14 states.

-      March 2006:  The United States, the European Communities and Canada brought panel proceedings at the WTO challenging Chinese regulations that impose *de facto* local content requirements in the auto sector through discriminatory charges on imported auto parts.  The WTO panel agreed with the United States, the European Communities, and Canada that China's regulations are inconsistent with China's WTO obligations.  China has agreed to make the necessary regulatory changes by September 2009.

-      February 2007:  The United States and Mexico initiated a WTO dispute against China challenging several tax measures that appeared to be export subsidies and import substitution subsidies prohibited under WTO rules.  Following establishment of a WTO panel to hear the case, China agreed to eliminate all of the prohibited subsidies raised in that dispute by January 1, 2008.  The United States has been carefully monitoring China's implementation of these commitments and has detected no problems to date.

-      April 2007:  The United States requested WTO dispute settlement consultations with China regarding certain measures pertaining to the protection and enforcement of intellectual property rights.  The WTO panel established to hear the dispute issued its final report in January 2009, finding WTO-inconsistent a Chinese law limiting the enforceability of copyrights before works obtain censorship approval and China's handling of border enforcement seizures.  The panel also clarified important legal standards relating to the criminal enforcement of copyrights and trademarks.  Neither party appealed the panel's report and it was adopted by the WTO's Dispute Settlement Body in March 2009.

-      April 2007: The United States filed a WTO dispute against China concerning market access restrictions in China on products of copyright-intensive industries, including publications and audio and video products. A WTO panel was established to hear the case in late November 2007, its final confidential report is expected to be provided to the parties in June 2009, and the public report should be available later this year.

-      December 2008:  The United States, Mexico, and Guatemala initiated a WTO dispute against China challenging more than 70 central government and sub-central government measures that appear to provide export subsidies prohibited under WTO rules.  The parties held consultations in February 2009.

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